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Economic Development of Japan. No.12 The Bubble Burst and Recession. P.202. Nikkei Stock Average 225. Urban land price index Source: Japan Real Estate Institute. P.205. GDP. After the bubble burst, economy looked up in 1996-97, 2000, 2003-07, 2010, 2012.

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economic development of japan
Economic Development of Japan

No.12 The Bubble Burst and Recession



Nikkei Stock Average 225

Urban land price index

Source: Japan Real Estate Institute




After the bubble burst, economy looked up in 1996-97, 2000, 2003-07, 2010, 2012.

Economy fell hard in 2008-09 due to Lehman Shock, which had greater macroeconomic impact than the earthquake & tsunami.

2011-:Euro shock

Industrial Production

the heisei bubble economic boom in late 1980s


The Heisei Bubble (Economic Boom in late 1980s)


  • Structural—bank deregulation and the loss of large corporate borrowers in the early 1980s led banks to overlend to risky borrowers (SMEs, real estate developers) without proper risk management.
  • Monetary—as the yen rose sharply after 1985, the Bank of Japan injected liquidity to counter it and ease endakafukyo (high-yen caused recession). This led to asset bubbles without igniting inflation.


Excess investment in properties, over-expansion in capacity, lavish consumption, rise in outward FDI

lost decade early 1990s early 2000s why did the recession last so long


Lost Decade (early 1990s-early 2000s):Why Did the Recession Last So Long?
  • Long adjustment after a large asset bubble
  • Non-performing loans (late policy response)
  • Japan’s economic system became obsolete (*maybe)
  • Aging population and associated problems (pension, medical care, dissaving, etc) (*)
  • Snowballing fiscal debt (*)
  • People’s lack of confidence in the future or policy (*)
  • Rise of China & other emerging economies (*)
  • Lack of political leadership to propose solutions, convince people, and implement actions

(*) True even today



Policy Issues for the Bank of Japan

Coping with non-performing loans – taking 10 years

--Jusen problem: failure of nonbanks specializing in real estate loans (1995-96)

--Bankruptcies of Yamaichi Securities & Hokkaido Takushoku Bank: credit crunch and mini bank runs (1997-98)

--Bank recapitalization: public money injection, creation of Financial Services Agency (1998-2000)

Monetary policy for recovery – unsuccessful

--Injecting liquidity by buying up unconventional assets (corporate & bank bonds, etc): but the monetary transmission mechanism was broken (MBMoneyLending)

--Zero interest rate policy (Feb.1999-Aug.2000; Mar.2001-Jul.2006; Dec.2008-)

--Inflation targeting? (Not adopted until 2013)

--New Dimension of Monetary Expansion (BOJ Kuroda, April 2013-)


Call rate(interbank short-term interest rate)


Zerointerest ratepolicy

Zerointerest ratepolicy

Lehman Shock

Money & bank lending

Excess reserves are built up during zero interest rate periods


International Reserves


Japan: Monthly Changes in International Reserves(Proxy for F/X intervention)

Buy Dollar (resist yen appreciation)

Sell Dollar (resist yen depreciation)

Source: McKinnon (2007)


Credit & Trust BankLong-term Credit BankHokkaido Takushoku BankChuo Trust BankMitsui Trust BankSumitomo Trust BankDaiwa BankSaitama BankKyowa BankYasuda Trust BankIndustrial Bank of JapanFuji BankDaiichi Kangyo BankSumitomo BankTaiyo Kobe BankMitsui BankToyo Trust BankTokai BankSanwa BankJapan Trust BankMitsubishi Trust BankBank of TokyoMitsubishi Bank




Chuo Mitsui Trust

Mitsui Sumitomo Trust Holdings


Risona Holdings

Saitama Kyowa


Mizuho Asset Trust

Mizuho Financial Group


Mitsui Sumitomo Financial Group

Mitsui Sumitomo

Taiyo Kobe Mitsui



Bank of Tokyo-Mitsubishi UFJ

Mitsubishi Tokyo

debate on fiscal stimuli


Debate on Fiscal Stimuli
  • Since the 1990s, large fiscal spending has been used to stimulate the economy. But there was no strong and sustained recovery, while the government debt skyrocketed.
  • Seeing this, some argued for even bigger stimuli; others said that would only worsen the debt crisis.
  • PM Koizumi (2001-06) set limits on spending (infrastructure, welfare).
  • PM Aso (2008-) and DPJ (2009-12) returned to big spending.
  • Consumption tax will be raised in steps: 5%8%(2014)10%(2015)
  • 2nd Abe Gov’t (2012-) turned to aggressive fiscal policy

Government debt as % of GDP

Bubble burst

shocks intermittent recovery 2003 2012
Shocks & Intermittent Recovery, 2003-2012

Main causes of recovery (2003-2007)

    • Strong foreign demand (US, China)
    • Decade-long corporate restructuring effort
    • Yen depreciation (up to 2007)

Lehman Shock and global recession (late 2008-2009)

    • Traditional industrial exports (cars, electronics) which were leading recovery suddenly lost export markets.
    • Thanks to strong demand in China and other emerging economies, growth picked up in 2010

Earthquake & tsunami (2011) and Euro Shock (2011-2012)

  • Production fell temporarily in 2011 due to supply chain disruption and depressed psychology, but recovered soon due to the start of vigorous reconstruction investment.
  • Recovery was fragile due to global recession (slowdown of emerging economies), yen appreciation, power shortage, etc.
earthquake nuclear disaster in 2011 economic impact and issues
Earthquake & Nuclear Disaster in 2011Economic Impact and Issues
  • Estimated stock damage from earthquake was 16.9 trillion yen (3.6% of GDP). (In 1995, Kobe earthquake’s damage was 9.9 trillion yen or 2.0% of GDP)
  • Earthquake recovery budget is 19 trillion yen (over 5 years, 4.0% of GDP) to 23 trillion yen (ultimately, 4.9% of GDP). This does not include costs related to nuclear disaster. (In 1995, Kobe earthquake recovery budget was 3 trillion yen or 0.6% of GDP).
  • Debate over funding: tax increase, debt issue or cutting spending incl. professors’ salaries and education budget (small saving?) But fiscal problem is mainly caused by social welfare explosion and not by earthquake.
  • DPJ’s handling of reconstruction plan, radiation problem, power shortage & future energy policy was random and inconsistent.
  • Growth impact of earthquake is almost neutral: supply disruption is offset by private & public investment for recovery.
deterioration of japanese politics
Deterioration of Japanese Politics?

Democratic Party of Japan (DPJ) 2009-2012

  • Between Koizumi and Abe2, there were six PMs in 6 years.
  • LDP (Abe, Fukuda, Aso: 2006-09) was unpopular leading to the change of government to DPJ in Aug.2009.
  • DPJ (Hatoyama, Kan, Noda: 2009-2012) proved even worse than LDP; random policies and amateur politics.
  • A shift from “1955 Regime” (LDP dominance) to alternating two-party competition was not realized.
  • As of July 2013: Abe’s popularity & fragmented oppositions are likely to enhance LDP’s rule in Upper House election.

Liberal Democratic Party (LDP) 1955-2009(except 1993-96)

Koizumi 2001-2006

LDP Abe No.2 2012-